Chapter -2

• Economic System refers to an arrangement by which the

central problems of the economy are solved.

• Central Problems
• - What to Produce?
• - How to Produce?
• - For Whom to Produce?

• Types of Economic System

• - Capitalist Economy
• - Socialist Economy
• - Mixed Economy
• A capitalist economy is an economy in which the means of production are
owned, controlled and operated by the private sector. So, the central
problems are solved through the market forces of demand and supply.

• Main motive of production is earning profits.

• How the Central problems are solved in capitalist economy:

• What to Produce - Only those goods are produced those are profitable in
the domestic or foreign market.

• How to Produce – Goods are produced using cheaper technique of

production. So, if the economy has cheap labour, labour intensive
technique is used and in case the costly labour, capital intensive
technique is used.

• For whom to Produce – The goods are produced on the basis for the
income of the consumers and not on the basis of their needs.
• A socialist economy is an economy in which the means of production
are owned, controlled and operated by the government.

• Main motive of production is society welfare.

• How the Central problems are solved in capitalist economy:

• What to Produce - Only those goods are produced those are in

accordance of the needs of the society.

• How to Produce – The government decides how to produce the

goods.

• For whom to Produce – The goods are produced on the basis on the
needs of the people and not on what they can afford.
• A mixed economy is an economy in which the public sector and
private sector are allocated their respective roles for solving the
central problems of the economy.

• Here the private sector produced goods that are profit making, and
government produce essential goods, which the private sector fails to
do.

• India adopted the Mixed economy

• Merits of Mixed Economy

• - Because of private entrepreneurs, GDP growth was encouraged as
they focused of profit maximisation.
• - Competition among the private entrepreneurs helped the society for
better quality products at cheaper rates.
• - They achieved equality in distribution of income promoting ‘social
justice’.
• It is defined as making major decisions that are taken by a
determined authority, on the basis of a comprehensive survey
of the economy as a whole.

• Economic planning means utilization of country’s resources in

different activities in accordance with the national priorities.
• A Planning Commission was set up.
• By the Government of India in 1950.
• Prime Minister as the Chairman.

• PURPOSE - The purpose of Planning Commission was to

assess the human and physical resource of the country and
plan to make its effective use.

• MAIN ROLE - The Industrial Policy Resolution (IPR) of 1948

and the Directive Principles of the Indian Constitution
assigned a leading role to the public sector. Private sector was
also encouraged to be part of the plan efforts.

• The Commission came up with a planning of 5 year period.

• Known as ‘Five Year Plans’.
• First Five Year Plan - 1st April 1951 to 31st March
1956.

• Aim of Five Year Plans

• - To remove economic backwardness of the
country and make India a developed country.
• - To ensure the benefit to the weaker section of
the population from the economic progress of the
country.
• GEMS

• G –Growth
• E – Equity
• M – Modernisation
• S – Self Sufficiency/ Self Reliance
• Growth refers to increase in the country’s capacity to produce the
output of goods and services within the country.

• It can be done by:

• -Increase the productive capital.
• -Increasing the efficiency of productive capital or services by
modern technology.
• -Increasing the supportive services like banking, transportation,
etc.

• A true indicator of economic growth was a consistent growth in

GDP.
• Structural composition means contribution of each sector in the
GDP. The trend was seen to be changing from the highest in
agriculture (50%) during British rule to highest in service sector
(40.59%).
• Growth, modernisation and self-reliance were considered beneficial only if
it benefited to all the sections of the economy. So, equity was considered as
an objective of the five year plans.

• The distribution of wealth should be as equal as possible and it aims to

increase the standard of living of all the sections of the society.

• It basically promoted economic and social equality.

• In short, Equity aims to raise the standard of living of all people and
promote social justice.

• Growth is meaningless if it is only bounded to handful people and it

widens the gap between rich and poor.

• It was done by:

• - Reduction in Economic Inequality.
• - Curbing the concentration of Economic Power.
• - Uplifting the weaker section of the society.
• It was down to raise the standard of living of people in the
society.

• It includes:
• - Adoptation of new technology – Modernisation aims to
increase the output using new technology. It leads to shift in
resources from one sector to the other sectors. For e.g.: HYV
seeds, new machines, etc.
• - Change in social outlook – Modernisation also aims to change
the outlook of people towards the society, like gender
empowerment, equal rights to women, equal wage rates, etc.

• So it led to shift from feudal and colonial economy into a modern

and independent economy.
• It means to not depend on any external assistance. So, India have to
develop through domestic resources.

• So in the first seven five year plans, to promote growth and

modernisation, main focus was given to use of own resources and less
dependency on the foreign countries.

• It was done :
• - To reduce foreign dependency – As India just got independence
from a British rule, so it was considered necessary to reduce
dependency on foreign countries, especially for food.
• - To avoid foreign interference – It was feared that depending on
foreign countries for food, technology, etc. may increase their
interference in the politics and policies of our country.

• E.g.: In 1965, USA threated India that they will stop the export of food
grains to India, if India didn’t stop the war with Pakistan.
• Low Productivity – Indian agricultural land was known for its low
productivity. It was mainly due to lack of knowledge, technology and
funds.

• Subsistence Farming – It means growing of crops for self-

consumption only. There were high incidents where no surplus
production was done by the farmers for trade.

• Disguised Unemployment – It means when more people are engaged

in a job that actually required. There were very high incidents of
disguised unemployment in the sector during 1950 and 1990.
• Out-dated Technology – There was use of obsolete and out-dated
technology for farming. It was mainly done manually and was very
tedious.

• Conflicts between tenants and landlords – There were a lot of

conflicts between the tenants and landlords as the landlords were
mainly interested in the lagaans irrespective of the conditions or the
needs of the tenants or cultivators.

• Dependency on Rainfall – Due to poor agricultural technology,

farmers dependent mainly on rainfall. There was minimum growth in
agricultural sector in the year that receives least rainfall.
LAND REFORMS
Institutional Reforms
Agrarian Reforms

• Abolishing the Intermediaries

• Land Ceiling
• The first and the most important action taken by the government is the
removal of intermediaries.

• Benefits
• - Abolishing the intermediaries bought 200 lakhs tenants to direct contact
the government.
• - The idea behind this step was that ownership of land would give incentives
to the actual tillers to make improvements, provided, sufficient capital was
made available to them.
• - More rational use of scare land resources and raise the production level by
motivating farmers and by giving incentives.

• Problems/Loopholes
• - In some areas, the former zamindars continued to own large areas of land by
making some loopholes in the legislation.
• - The zamindars themselves claimed to be the self-cultivators.
• - Even after getting the ownership, the poorest famers did not benefit from the
land reforms as they lack funds and resources.
• It refers to fixing the specified limit of land, which could be owned by an individual.

• Beyond the specified limit, all lands belonging to a particular person would be taken
over by the Government and then the same be allotted to the landless cultivators
and small farmers.

• Purpose
• - The main aim was to reduce the concentration of land ownership in few hands.
• - It helped to promote equity in the agriculture sector.
• - Promote utmost social welfare by distributing land to landless cultivators.
• - Raise standard of living of the rural poor.

• Problems/Loopholes
• - It was challenged by the big landlords in the courts, which delayed its
implementation.
• - Due to this delay, the landlords got their land registered in the name of their close-
relatives, escaping the land ceiling legislation.
• - Moreover, the land that was redistributed was of very poor quality.